The Battle For Supremacy In The Music Streaming Space And What It Means For Marketers

Music streaming is a multi-billion industry with opportunities for marketers.Pexels

Streaming music has arrived in a major way. It’s become the preferred medium of music consumption and a key growth engine for music industry sales, accounting for 62% of the U.S. music business. There’s an ongoing battle for dominance between Spotify, Apple, Google and Amazon for a slice of the music business that is expected to remain on a strong growth trajectory.

To help put things into perspective, I recently spoke with Santosh Rao, Head of Research at Manhattan Venture Partners, about some of the major moves happening in the space, the opportunities for marketers and why Spotify could reign supreme.

Steve Olenski: This is obviously a hyper-competitive business. Give us some context on what’s happening and what this ultimately means for consumers.

Santosh Rao: Whoever wins in this space will need to compete on a whole other level than what we’ve traditionally seen from streaming music services, particularly in the areas of service quality, sticky content and ease of discovery. Spotify is leading on all these attributes. Its rich content library is combined with a unique ability to match artists, songs and playlists to users’ tastes — and it’s all delivered seamlessly across multiple platforms. This has helped them achieve scale and see a high free-to-paid conversion rate.

Apple Music, meanwhile, is nipping at Spotify’s heels but has not been able to close this gap. Streaming offerings from Amazon and Google have the benefit of name recognition but have not taken off. Spotify, unlike the major players (Apple, Google, Amazon), is benefitting from being a pure-play music streaming company as opposed to a diversified offering.

Consumers will be the ultimate beneficiaries of this competitive environment, as they always are. The competitive environment is keeping prices in check and in some cases dropping. Additionally, given the increasing share of streaming in the mix of total recording music revenue, the music labels and artists are becoming more constructive with the providers including Spotify. This will ultimately improve the profitability and the quality of service offered by the streaming companies.

Olenski: Your latest report anticipates an exit for Spotify in 2018 at a valuation of nearly $20 billion. What have they been doing right that could prepare them for an IPO in the new year?

Rao: There’s three factors. First, Spotify has established itself as the best of breed company in its category, and is growing its user base. Best of breed B2C companies always command high ad rates and premium valuation, provided the user base is also growing. Take Snap Inc., Blue Apron and Twitter as examples. All good services in their niches but getting killed right now because the user growth has been challenged. Spotify, on the other hand, is well positioned.

Second, Spotify renewed its contracts in 2017 with major music labels and also entered into new partnerships with small independent labels. Ongoing and unsettled negotiations for new contracts were previously a major hurdle for them to go public. With the new contracts in the bag, reportedly at better terms than the previous contracts, the company can focus on new investments and broaden its global footprint.

Third, Spotify has been growing its listener base at a faster clip than its competitors. As of July 2017, the company reported 140 million total listeners including 60 million paid listeners, suggesting an impressive free-to-premium conversion rate. Its closest competitor, Apple Music, is struggling with 30-40 million paid users. With close to a billion iPhones you would think Apple Music would have a more captive audience.

This is driving a healthy top-line growth and margin improvement for Spotify. Post-IPO, these metrics will be absolutely important and we can expect Spotify to show sequential improvement into 2018 and ahead.

Olenski: What impact could a Spotify IPO have on the space?

Rao: We can see Spotify becoming a consolidator in the space on the back of its public currency. The music streaming business is relatively nascent and fragmented, so Spotify can help in rationalizing the market by making tuck-in acquisitions of smaller streaming companies — particularly in the international markets — and acquiring adjacent businesses in video, ad-tech and other relevant emerging consumer-facing businesses. Depending on the reception of Spotify’s IPO, we could also see more IPOs and/or spin-offs of other music streaming services.

Spotify could also become an acquiree. The lastest news that Tencent and Spotify are taking a minority stake in each other is interesting, and needs watching. Additionally, Tencent will make its own investment in Spotify by purchasing secondary shares from existing backers. Both companies will expand their reach beyond their core markets.

Olenski: What else can we expect to see happening as far as the broader music industry is concerned?

Rao: I expect the competitive landscape to get more intense. Most of the internet majors -- Apple, Google, Amazon, Tencent -- will compete aggressively for the incremental user. Google’s YouTube just announced that it is planning to launch a new streaming service in March to compete with Spotify and Apple Music. The new service would be based on YouTube Red, the current premium offering from the video site. You will see consolidation. Apple just announced that it is in talks to acquire Shazam, whose software helps users identify songs by pointing their phone at an audio source.

Given the growing clout of streaming services, Spotify and other such companies will evolve into more potent platforms. For instance, they could help launch new artists on their platforms, bypassing the music labels; go deeper into original programming; beef up video programming capabilities; and introduce more interactions and marketing events with artists.

The music industry will look at applications of VR and AR technologies to drive music sales. It’s not immediately clear how the music industry will leverage the potential of VR and AR applications, but we can see some innovative applications down the road.

Partnerships across verticals will also become more mainstream. Think partnerships with major telcos, auto companies, ride-sharing companies, etc.

Olenski: What have been some of the challenges for marketers looking to break into the music streaming space, and where do you see the biggest opportunities in the near future?

Rao: Marketing on music platforms has been a challenge. Music is essentially an audial experience, consumed primarily on mobile devices, on the go. On top of that, music listeners prefer to listen to music without the ad interruptions. That explains why on-demand subscription-based streaming business models have been successful (i.e. Spotify, Apple Music) and free, ad-based models have failed (i.e., Pandora).

That said, Spotify and others have a large base of users that consume streaming music for free. Accordingly, marketers need to deliver tasteful, highly-targeted ads that enhance, not disrupt, the listening experience. Spotify has been generating ad revenue growth because of its effective targeting capabilities. Banner ads are generally shown at the top of the Spotify browser when a user signs in. Then, when they’re already listening to a playlist or selection of songs, the display ad moves to the bottom of the page. Overall, multiple ad formats on the platform are very effective for display advertisers to get healthy ROI.

Olenski: What would you say is the untapped international growth looking ahead?

Rao: The global market opportunity is compelling. The growing adoption of smartphones in emerging markets, in step with rising broadband penetration and growing middle class provide strong tailwind for global growth. Countries such as India, Indonesia and South Africa are just a few examples that are ripe for incremental growth. Additionally, ‘localised content’ offering in the emerging markets will attract local users — particularly in non-English speaking countries. Offering a rich library of bollywood songs in India, for instance, will be a strong funnel to attract new listeners.

Olenski: What are some opportunities for content creators and artists?

Rao: With the growing clout of streaming services, the initial hostility the content creators and artists had toward streaming services is diminishing. Artists are beginning to accept the power of recurring income over the long term versus the immediate tangible payout from physical sales. Sales of physical copies are on a secular decline, in sync with the broader trend toward “renting” over “buying” of products and services.

In 2011, 331 million CDs, CSs, LPs and digital albums were sold in the U.S, but this figure fell to just over 200 million in 2016, according to to Statista. According to RIAA data, estimated retail revenues from recorded music in the United States grew 11.4% in 2016 to $7.7 billion driven by doubling of paid streaming music subscriptions. At wholesale values, the industry was up 9.3% to $5.3 billion.

Olenski: Finally, what are your predictions for the next 2-3 years.

Rao: More consolidation. The streaming music business will eventually come down to two or three big players. The odds are high that if Apple, Google and Amazon fail to gain the traction needed to have a sustainable business, either Spotify will be acquired by one of them or Spotify will acquire the spinoffs. In looking at global expansion, Tencent or Alibaba could emerge as likely consolidators. With volumes of valuable user data, a large user base, and a global footprint, marketers will have an effective avenue to showcase their products and services.